Why is stablecoin catching investors’ attention?

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 Why is stablecoin catching investors’ attention?
Image source: © Rummess | Megapixl.com

Highlights 

  • A stablecoin is a digital currency which is tied to a commodity or fiat currency, like the US dollar
  • A Stablecoin’s value will remain stable even after an extended period of time and this will ease losses should a significant drop in the market occur

When one associates words with cryptocurrency, one word that may spring to mind is ‘volatility’. This is no wonder, considering the path crypto has taken just this year. Bitcoin – the world’s premier digital currency – went from historic highs to soul crushing lows in the space of a month and now is still struggling to keep its head above the US$50,000 mark.

However, in the vast world of cryptocurrency, there exists a safe haven, which is (on paper) immune from the fragility of the market – a place where crypto traders can park their capital without fear of losing a huge portion of its value in a short period of time.

That safe haven is stablecoins. A stablecoin is a digital currency which is tied to a commodity or fiat currency, like the US dollar. Thus, as the name would suggest, the value of a stablecoin remains stable, even when all surrounding cryptos are crumbling around it.

This year has seen investors putting their capital in stablecoins increasingly – a trend which has caught the attention of the US Treasury Department, which reportedly held meetings last week to discuss possible regulations for private stablecoins.

What is a Stablecoin?

Stablecoins are a range of cryptocurrencies that offer price stability and derives its market value from an external reference, like commodities, currencies, and other financial capital.

Stablecoins have become more popular recently as they aim to bring investors and traders both the safety and stability, which is generally believed to lack in cryptos

By being backed by assets, Stablecoins like Tether are not subject to volatility and remain stable.

Tether

Tether is the most popular Stablecoin with a current market capitalisation of US$$68,284,329,898, making it the fourth largest cryptocurrency, according to CoinMarketCap. Tether is backed by the US dollar and maintains a the same value as it.

Image description – Tether, stablecoin, bitcoin

Image source © Awargula | Megapixl.com

USD Coin (USDC)

USDC is built on the vast Ethereum protocol- ERC20. It is managed by two reputable crypto companies - Circle and Coinbase. All the worldwide transactions occur through established finance firms and comply with the U.S. money transmission laws.

Advantages of Investing in Stablecoins

The main feature of a Stablecoin is that its value will remain stable even after an extended period of time and this will ease losses should a significant drop in the market occur.

Additionally, stablecoins are more convenient for people to use compared to other high-risk digital currencies. Regular audits also give Stablecoins greater transparency.

Stablecoins also may increase the decentralisation of the wider crypto market as Bitcoin’s price volatility is currently preventing new investors from making investments in their currency and therefore make it a prospective investment option.

Disadvantages of Investing in Stablecoins

Stablecoins can be stolen from your bank account and the owners remain confidential because the collateral system is entirely decentralised. Thus, security and trust issues arise with Stablecoins.

Additionally, there are no gains investing in Stablecoins even after a long period of investing. This is counter to other cryptos whose value rises and falls depending on the market pressures.

Bottom Line

Stablecoins are a safe way to store digital currency and not fall victim to sudden price drops. That being said, investors shouldn’t expect a return on their money.

 

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